Four Major Structural Challenges Facing the US Dollar in Early 2026

FX678, January 28—— At the beginning of 2026, the US dollar is facing a predicament of mounting pressure: the EUR/USD exchange rate continues to climb strongly, the US Dollar Index has fallen back to its lowest level since 2022, gold prices have broken through historical highs, and US assets are experiencing massive capital outflows. These market phenomena are not isolated, but are jointly driven by four intertwined core factors.

At the beginning of 2026, the US dollar is facing a predicament of mounting pressure: the EUR/USD exchange rate continues to climb strongly, the US Dollar Index has fallen back to its lowest level since 2022, gold prices have broken through historical highs, and US assets are experiencing massive capital outflows. These market developments are not independent occurrences, but are jointly driven by four intertwined core factors—rotation of investment portfolios from US assets to global markets (especially emerging markets), sustained profits from carry trades accelerating dollar selling, rising risks of a US government shutdown, and heightened expectations of policy intervention to weaken the dollar. Currently, the weakness of the US dollar has gradually evolved from short-term fluctuations to broader structural challenges.

The rise of EUR/USD has solid support and has accelerated by the end of January 2026. The core driver of this exchange rate trend comes from the significant divergence in monetary policies between the two major economies: the Federal Reserve faces expectations of further monetary easing due to concerns over US economic growth prospects, while the European Central Bank (ECB) and other major central banks have maintained relatively firm, and in some cases even hawkish, stances. As a result, the US Dollar Index (DXY) has continued to fall back to near last year's lows, reaching levels not seen on a sustained basis since early 2022, and has recently dropped into the mid-96 range.



As the US dollar weakens, coupled with favorable interest rate differentials between the dollar and eight highly liquid emerging market currencies, carry trade strategies achieved a return of about 18% in 2025, marking the best performance since 2009. In the first few weeks of 2026, this strategy has already yielded approximately 1.3%, continuing its strong performance.

Major investment banks like Morgan Stanley, Bank of America, and Citigroup remain optimistic about the effectiveness of carry trades in 2026, recommending prioritization of currencies from countries with tightening monetary policies, higher interest rates, and credible central banks, with Brazil, Mexico, and other emerging markets as core targets. The widening interest rate differentials and low forex volatility in these markets continue to attract global capital inflows.



The US dollar is under pressure from a large-scale rotation of investment portfolios out of US assets. As of the week ending January 21, 2026, net outflows from key US ETFs reached $17 billion, reflecting a broad "sell America" sentiment driven by US fiscal uncertainty and policy unpredictability.

Although European and Japanese assets have seen modest inflows, these pale in comparison to emerging markets. Since the beginning of January 2026, ETFs focused on emerging market assets have attracted as much as $134 billion, marking the strongest start since 2012. Behind this trend are the higher yields offered by emerging markets and global investors' growing need for diversified asset allocation amid the vulnerability of US dollar assets.



Rumors of a new round of US government shutdowns continue to ferment, further weighing on the US Dollar Index. According to prediction market data from platforms like Polymarket, by the end of January, the probability of a shutdown had risen to 78%-81%. This probability spiked after the Minneapolis incident (involving federal immigration enforcement actions) triggered public backlash and strong criticism from the Democratic Party. A government shutdown would not only disrupt normal administrative operations, drag down GDP growth, and delay key fiscal expenditures, but would also accelerate market expectations for the Federal Reserve to cut rates sooner and more aggressively to offset economic downside risks.

Meanwhile, rumors persist in the market about US-Japan coordinated intervention in the forex market to weaken the dollar and support the yen. US Treasury Secretary Scott Bessent recently stated publicly that there is "no direct link" between exchange rates and the traditional "strong dollar policy," implying that the US government is open to a weaker dollar and is seeking to boost export competitiveness and support domestic industries through dollar depreciation. The White House is also increasingly inclined to adopt devaluation measures, in line with broader goals of reducing the trade deficit, countering tariff threats, and managing geopolitical friction. Such policy signals have further strengthened market expectations for a weaker dollar.


In an environment where the dollar is under pressure and risk factors are intertwined, it is no surprise that gold prices have soared to record highs. Recently, the precious metal has repeatedly broken through the $5,000 per ounce mark, reaching above $5,100 at its peak. The market's perception of gold has surpassed its traditional role as an inflation hedge; it is now seen as a core "insurance asset" against the risks posed by Donald Trump’s policy agenda—including aggressive tariff policies, fiscal expansion risks, potential threats to Federal Reserve independence, and broad geopolitical and economic uncertainties.

Analysts from Société Générale, Morgan Stanley, and other institutions point out that if the aforementioned factors suppressing the dollar continue to intensify, gold prices could climb to $6,000 per ounce or higher by the end of the year.

In summary, the four major issues—investment portfolio rotation, carry trade profits, government shutdown risk, and weak dollar policy expectations—jointly constitute the significant downward pressure faced by the US dollar at the beginning of 2026. Although some institutions predict that the dollar may see a temporary rebound if the US economy recovers later, the prevailing market sentiment currently remains bearish on the dollar while bullish on gold and emerging market assets.